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Off-plan property market

The Dubai off-plan property market is booming. Although developers claim they have adjusted their build portfolios to meet affordability issues of low to mid-income end-users, it has been observed that investors are, in fact, lapping up a majority of these newly launched off-plan properties.

Investors who do not qualify for home loans are being encouraged by attractive price points, flexible payment plans and high yields being touted by developers.

“Even with attractive payment plans, end-users transitioning from rental to ownership most often prefer off-plan units nearing completion to avoid prolonged periods of paying both existing rents and the pre-occupancy payment plans of the acquired off-plan unit,” says David Godchaux, CEO of Core Savills.

End-users prefer properties closer to completion since they will qualify for a mortgage and have to pay only 25 per cent of the property’s sales price as the down payment.

“If secondary market prices are in their range, end-users are better off buying with a mortgage with low interest rates. Currently, mortgage repayments work to below rents. An end-user is better off paying EMIs towards his equity than paying rent,” suggests Sanjay Chimnani, managing director, Raine & Horne Dubai.

According to a recent Q3 report by Core Savills, anecdotal evidence suggests a mismatch between affordable stock being brought to market and the requirements of prospective home owners. “While studio and one-bed units primarily appeal to investors due to the high yields, lower price point and higher liquidity, end-user demand is more for smaller one to two-bedroom units at lower prices,” cites the report.

Developers have been launching a slew of off-plan projects in the lower price segment. Over the next five years, 43 per cent of the upcoming supply is below the Dh1,000 psf level, estimates Global Capital Partners (GCP). Much of this new supply is located in areas like Dubailand, Dubai South, Al Qudra corridor and Al Furjan.

“The yields in outer areas and on affordable stock have not compressed significantly in the past two years unlike what has been witnessed in the mid and prime segment within more central locations. The high level of current yields are attracting investors and make it an easier sale and faster exit for some developers than targeting end-users in the mid segment,” observes Godchaux.

However, market experts believe there will not be sufficient tenant and sales demand in these upcoming areas to keep pace with the rising supply in the medium term. The high yields being promised by developers today may not materialise tomorrow and investors’ expectations of return and capital appreciation might be deceived.

“Nonetheless, these outer areas will gradually adjust to tenant demand and be shelped by a reverse migration from northern emirates, increasing occupancy levels over the next three to four years or more, although at a slow absorption rate,” forecasts Godchaux.

Communities such as Mira and Mudon that are on the outskirts of the city have become popular with residents. There has been a migration effect towards these areas as renters scope out value-for-money trades.

“Risks for investors mostly relate to infrastructure issues in the outskirts. Communities that have inadequate infrastructure trade at a discount to the ones that do, both in terms of rents as well as sales prices,” warns Hussain Alladin, head of IR and research at GCP Properties.

Buyers are also advised not to wait too long for the market to bottom out. “Currently, the timing to enter couldn’t be better for an end-user. Good pricing, low interest rates and better payment plans make buying attractive. Most people end up waiting too long, the market turns positive and they miss the opportunity,” says Chimnani.

Although oversupply fears are prevalent in the lower end of the market, most stakeholders believe this will be corrected by 2020.

“It is unlikely there will be an oversupply since the actualisation rate of supply has always historically been substantially lower than projections,” informs Alladin.